Electoral Reforms: Political Contributions by Companies

In the past, we
have had a chance to discuss various issues pertaining to election campaign
financing by the corporate sector (here,here
and here).
Last week, the Law Commission of India issued its Report No. 255
on Electoral Reforms that, among other matters, touches upon reforms in the
area of corporate financing of political parties. In this post, I briefly
examine some of the key issues. Of course, the report is much wider than that
and deals with all aspects of electoral reforms, but this post is limited to
corporate funding.

The present law
relating to corporate funding of political parties and election campaigns is
contained in section 182 of the Companies Act, 2013. It allows a company (other
than a government company) that has been in existence for at least 3 years to
annually contribute up to 7.5% of its average net profits during the three
immediately preceding financial years. Such spending must be authorized by a
resolution of the board of directors, which shall constitute sufficient
justification for such contribution. The statutory provision also deals with
specific types of expenditures that would fall within the purview of the
section. In addition, the Act imposes disclosure obligations whereby political
contributions must be disclosed in the profit and loss account for each
financial year giving particulars of the total amount contributed and the name
of the political party to which such amount has been contributed.

After considering
the legal regimes in various countries, the principal shortcoming of the Indian
dispensation as exposed by the Law Commission report relates to the fact that
political contributions can be determined solely by the board and does not
require shareholder approval. This is arguably inadequate as political
contributions constitute an important decision which must be made by the shareholders
and not delegated to the board. This goes to the heart of the division of
powers between the board and the shareholders.

As the report
notes:

2.27.13 … the authorisation of corporate contribution requires a resolution
to be passed to such effect at the meeting of the Board of Directors under
Section 182(1) of the Companies Act, 2013. The empowerment of a small group to
decide how to use the funds of a company for political purposes, instead of
involving the vast numbers of shareholders (being the actual owners of the
company) has also been criticised. Britain follows such a shareholder approach
where British companies require shareholder approval before they can make any
political contribution or incur any political expenditure.

The report also
contains a brief discussion on the status of companies and their ability to
espouse constitutional rights:

2.27.15 Despite the various legal lacunae, electoral reform is
possible and will not be impeded by free speech claims as in the United States,
evident in the Citizens United and McCutcheon decisions. In India, Article
19(1) of the Constitution only extends to citizens and natural persons, and
corporations have not been considered citizens with free speech rights, can
only be exercised by shareholders. Thus, corporations do not have a right to make
a political contribution as part of their exercise of free speech rights, especially
given the non-involvement of shareholders in this decision making process.
Apart from that, countervailing interests of equality, anti-corruption, and
public morality will provide a constitutional basis for any election finance reform.

The principal
recommendation of the Law Commission is that section 182 must be amended to
require shareholder approval for electoral spending. In other words, the
decision must not be left only to the board, and that shareholders must have a
veto power as well, given the importance of the subject-matter.

Separately, the
report also raises some issues regarding the annual limit of 7.5% of average
net profits (which was increased from 5% under the Companies Act, 1956). The anxiety
of the Law Commission appears to arise from the fact that the 7.5% of net
profits in big companies can be quite substantial thereby making the limit
meaningless. Although the report is not explicit on the type of amendment
sought, it is reasonable to assume that would relate to a sliding scale,
whereby larger the company the lower the limit. However, it is not clear
whether that would be necessary. From a corporate perspective, what matters is
the outflow as a percentage of profits and not the magnitude of the absolute
amounts.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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